A study of auditors' judgement when taking management's perspective on management discussion and analysis

Abstract

This experimental research examines the effect of management’s perspective on auditors’ judgment when they review management discussion and analysis (MD&A). This study predicts that prompting management’s perspective would benefit auditors by enabling them to more accurately review MD&A whether or not the MD&A is materially misstated. Contrary to our expectations, prompting auditors with a management’s perspective will backfire. The results find that auditors prompted by management's perspective are significantly more likely to accept MD&A that has an abnormally positive tone. In other words, auditors are less likely to ask management to alter MD&A that has such abnormally positive language. Management’s perspective will trigger auditors’ pre-existing motivation, making them much more likely to maintain a good relationship with clients to justify a management-preferred conclusion. This study expands the understanding of taking management’s perspective could influence auditors’ judgement when reviewing MD&A. Moreover, the findings of this study highlight the potential bias that comes from prompting auditors to take a management’s perspective.